April 1 (Bloomberg) -- Berkshire Hathaway Inc. former
manager David Sokol exercised poor judgment yet may not have
broken insider-trading laws by buying stock in a company he
later proposed as a takeover target to Chairman Warren Buffett,
legal experts said.

Sokol, 54, bought 96,060 shares of Lubrizol Corp. in early
January before recommending that Omaha, Nebraska-based Berkshire
Hathaway acquire the company, Buffett said in a March 30
statement announcing Sokol’s resignation. Sokol had dinner on
Jan. 25 with Lubrizol Chief Executive Officer James Hambrick,
sparking Buffett’s interest in the deal, according to the
statement.

Sokol bought the shares before discussing Lubrizol with
Buffett and had “no voice in Berkshire’s decision once he
suggested the idea,” said Buffett, 80. Berkshire announced
March 14 that it was acquiring Lubrizol, an engine lubricant-maker, for $9 billion. Sokol may have made a profit of about $3
million, according to Buffett’s disclosure and data compiled by
Bloomberg.

“I don’t think this is insider trading,” said John
Coffee, a Columbia University law professor. “This is
misconduct because he knowingly placed himself in a conflict-of-interest position. Once he made a multimillion-dollar investment
in Lubrizol, he could no longer serve as an objective agent for
Berkshire Hathaway because his own interests were that Berkshire
Hathaway make an acquisition.”

SEC Probe

The U.S. Securities and Exchange Commission is probing
whether Sokol bought Lubrizol shares on inside information, said
a person with knowledge of the matter who declined to be
identified because the investigation is secret. The SEC is
seeking records from Sokol’s brokerage and examining trading
data from the Financial Industry Regulatory Authority, the
person said.

In his statement, Buffett said that “neither Dave nor I
feel his Lubrizol purchases were in any way unlawful.” Sokol,
who was considered a possible successor to Buffett, didn’t
believe he “did anything wrong,” he said yesterday in a CNBC
interview.

“I can understand the appearance issue and that’s why we
made it public in the press release,” Sokol said. “The reality
is that I have no control over a deal ever happening.”

Sokol said that the 96,060 Lubrizol shares he bought on
Jan. 5, 6 and 7 ranged in price from $102 to $104 each, meaning
he paid at least $9.8 million.

His stake as reported by Buffett would have been worth
about $9.92 million on Jan. 7, based on the closing price on the
New York Stock Exchange. The shares have risen about 30 percent
to $133.96 since Buffett’s deal was announced, boosting the
stake, if Sokol still owns it, to $12.9 million.

CEO Meeting

Sokol had instructed Citigroup Inc. on Dec. 13 to arrange a
meeting with Lubrizol CEO James Hambrick, according to an SEC
filing last week. The two men spoke on the telephone on Jan. 14
and met on Jan. 25.

Sokol first told Buffett on either Jan. 14 or 15 about the
idea of Berkshire Hathaway’s buying Wickliffe, Ohio-based
Lubrizol, leaving his boss “unimpressed,” according to
Buffett’s statement. After Buffett learned of Sokol’s CEO dinner
meeting, he “quickly warmed to the idea” of the acquisition.

Insider trading typically involves someone buying or
selling stock after receiving material, non-public information
from someone with a duty to keep it confidential.

“On the surface, it would be hard to say that he illegally
traded on inside information,” said Paul Atkins, a former SEC
commissioner who is now a financial services consultant. “The
question is: to whom did he have a duty of confidentiality, and
did he violate that duty?”

Robert Heim, a former assistant regional director of the
SEC’s New York office, said another issue is whether Sokol had
material, non-public information.

Nonpublic

“What’s been disclosed to date is that it was non-public,” Heim said. “The question is whether the merger
process was far enough along to deem it material.”

“I don’t think he violated any securities laws,
specifically insider trading,” said Peter Henning, a law
professor at Wayne State University. “I don’t think that this
type of information rose to the level of materiality that the
SEC would need to bring a case. The SEC likes cleaner cases in
which the information is more obviously material. It helps them
to establish fraud if there is some kind of hiding of his
trading, and he does not appear to have done that.”

Heim said Sokol “certainly exercised poor judgment by
purchasing a stock that he later brought to the attention of
Warren Buffett as a possible acquisition candidate. An executive
like Mr. Sokol is not permitted to use information that he
gained during the course of his employment for personal
financial gain.”

Open Question

The Code of Business Conduct and Ethics on Berkshire
Hathaway’s website urges employees to remember Buffett’s “rule
of thumb.” They must “ask themselves whether they are willing
to have any contemplated act appear the next day on the front
page of their local paper -- to be read by their spouses,
children and friends -- with the reporting done by an informed
and critical reporter.”

Employees with access to confidential information can’t use
or share it “for any other purpose except the conduct of the
company’s business,” according to the code.

Sokol told CNBC that Berkshire Hathaway had a list of
stocks that employees were banned from trading in, and Lubrizol
wasn’t on that list.

Good Judgment?

Attorney Philip Korologos of Boies Schiller & Flexner LLP
said: “People are going to focus on whether he exercised good
judgment given the role he played in recommending companies for
Berkshire Hathaway to invest in. Given the focus, I would bet he
wishes now that he had done it differently.”

Sokol was chairman of Berkshire’s MidAmerican Energy
Holdings and its Johns Manville roofing unit. He was also CEO of
NetJets Inc., Berkshire’s luxury-flight unit.

Sokol’s compensation from MidAmerican totaled $59.5 million
in the last five years, according to the unit’s SEC filings.

Sokol joined Berkshire in 2000 when he sold MidAmerican,
which he led as CEO, to Buffett for about $9 billion. Under
Berkshire, Sokol retained a minority equity stake in MidAmerican
and expanded the unit by buying a natural gas pipeline and power
producers in California and the U.K.

Sokol relinquished the CEO job in 2008 and broadened his
duties at Berkshire by scouting deals, including an investment
in China’s BYD Co. and a rescue for Constellation Energy Group
Inc.

‘Heir Apparent’

“He was the heir apparent,” said David Kass, a professor
at the University of Maryland’s Robert H. Smith School of
Business. “The exercise of his recommending Lubrizol to Warren
Buffett was like a CEO in training.”

Berkshire said in February that it had four candidates to
succeed Buffett as CEO, without publicly identifying them.
Investors including Buffett biographer Andrew Kilpatrick had
said Sokol was the most likely successor.

Buffett said in the statement that he hadn’t asked for
Sokol’s resignation and that it came as a surprise. Twice before
in past years, Sokol had considered resigning and been persuaded
to stay, Buffett said. Berkshire is “far more valuable today”
because of Sokol’s service, Buffett said. Sokol said he will
devote his career to investing his family’s resources and may
start an enterprise, according to Buffett’s statement.